Monetary normalisation a cause for concern in the eurozone, political risk weakening Brazil

Macro Highlights - 7/5/2017

In short
  • Monetary normalisation a cause for concern in the eurozone - political risk weakening Brazil
  • Focus on Switzerland: Savings will continue to limit consumption growth

Key Takeaways of the week with Matthias van den Heuvel, Economist, Sophie Casanova, Economist, Central Banks, and François Léonet, Economist, Emerging Markets

Monetary normalisation a cause for concern in the eurozone

  • M. Draghi’s statements have been viewed as hawkish, driving up both yields and the euro. However, the weak level of inflation supports our scenario for the ECB to maintain its accommodative stance

The economic statistics released this week in the eurozone have effectively confirmed that activity levels are picking up and there are no inflationary pressures.

The monetary statistics have revealed a further acceleration in bank lending to households in May, up 2.4% to 2.6% year-on-year. For business lending, the year-on-year figure is stable at 2.4%.

In terms of price trends, total inflation continued to slow down in June, cooling to 1.3% after 1.4% in May. Core inflation has strengthened slightly, climbing from 0.9% to 1.1% in June, linked in particular to the increase in prices for services, up from 1.3% in May to 1.6% year-on-year. However, inflationary pressures remain under control: during the first half of 2017, core inflation averaged out at 1.0%, following 0.9% in 2016.

These statistics have not prevented a sharp rise in expectations for a monetary tightening to be rolled out soon in the eurozone. These have been fuelled by M. Draghi’s comments during his introductory speech at the ECB’s annual forum in Sintra on 27 June.

The ECB President declared that the central bank could adjust its monetary policy parameters as the recovery continues. Even though he clearly stated that the objective would not be to tighten monetary conditions, and also added that these monetary policy adjustments should be made with extreme caution, his statements have been viewed as hawkish, aiming to announce the ECB’s first step towards monetary normalisation. [...]

Political risk weakening Brazil

  • The political uncertainty in Brazil is increasing, in line with our expectations. We are therefore maintaining our forecast for a very slight acceleration in growth in 2017

In Brazil, on 26 June, Prosecutor General R. Janot filed formal charges for passive corruption against President M. Temer. The case will now be analysed with an advisory opinion from the Chamber of Deputies Legal Committee before being voted on by the deputies themselves, probably in mid-August. M. Temer would be charged and legal proceedings initiated with the Supreme Court judges if two thirds of the deputies, i.e. 342 out of a total of 513, vote in favour of the charges. Once this has been approved by a majority of the Supreme Court members, M. Temer would be removed from power for 180 days and replaced by the President of the Chamber of Deputies, R. Maia. If he was found guilty, M. Temer would be removed from power definitively and indirect elections would be held in Congress within 30 days.

Brazil’s political uncertainty is therefore expected to continue for the next few months, especially as M. Temer may face further charges for obstruction of justice and criminal association. His historically weak popularity levels and the holding of general elections in October 2018 are likely to encourage some political machinations, which means that although the configuration of the Chamber of Deputies seems to be favourable for him, there is a real risk of M. Temer being removed from power.

These political developments and the resulting weakening of the government are likely to call into question the country’s necessary budget consolidation – the pensions reform could be put back to 2018 – and reinforce international investors’ concerns regarding public finances.” [...]

Sophie Casanova, Economist, Central Banks, and François Léonet, Economist, Emerging Markets




Savings will continue to limit consumption growth

  • Swiss growth accelerated slightly in the first quarter of 2017 to 0.3%, following 0% and 0.2% at the end of 2016…

  • ... thanks to strong growth in exports and business investment

  • However, the property market slowdown and the high household savings rate are expected to continue weighing on growth, which we forecast at 1.4% for 2017

The Swiss economy’s recovery has continued to move forward, although more slowly than expected in the first quarter of 2017. However, quarterly GDP growth accelerated compared with the previous two quarters to reach 0.3%. This acceleration reflects strong growth for both exports (3.7% versus the fourth quarter of 2016) and investment in capital goods (1.7%), while the rate of growth has slowed down for both private consumption and public consumption. The manufacturing industry and health sectors have made significant progress (contributing 0.4% and 0.1% respectively), while the overall result was negatively affected by the service sector.

According to the latest KOF and PMI/Crédit Suisse leading indicators, which both came in well above their long-term averages in June, GDP growth is expected to consolidate in the second quarter, confirming our forecast for quarter-on-quarter growth of 0.5%. However, certain more structural elements are continuing to undermine Swiss economic growth. On the one hand, the property market slowdown is putting the brakes on residential investment, and on the other hand, the household savings rate is expected to remain high for the next few years and continue to limit private consumption growth.

In line with our forecasts, the property market slowdown that began in 2012 is continuing, which is affecting economic growth. Construction investment increased by just 0.3% year-on-year in the first quarter of 2017, compared with an average of 3% for 2009-2014. Held back by the macroprudential measures rolled out by the federal authorities since 2012, mortgage lending has also continued to slow down. Growth averaged out at only 2.5% over the first four months of the year, compared with 2.6% in 2016 and 5.4% in 2012. In the first quarter of 2017, residential property prices remained very close to the levels seen one year ago. Lastly, the mortgage reference rate was cut from 1.75% to 1.5% on 2 June. This entitles tenants to ask for a reduction in their rent, which is expected to reduce rental yields and have a further negative impact on residential investment. [...]

Matthias van den Heuvel, Economist